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Edited Transcript of SPN earnings conference call or presentation 6-Nov-19 2:00pm GMT

Q3 2019 Superior Energy Services Inc Earnings Call

NEW ORLEANS Nov 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Superior Energy Services Inc earnings conference call or presentation Wednesday, November 6, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David D. Dunlap

Superior Energy Services, Inc. - President, CEO & Director

* Paul Vincent

Superior Energy Services, Inc. - VP of IR

* Westervelt T. Ballard

Superior Energy Services, Inc. - Executive VP, CFO & Treasurer

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Conference Call Participants

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* John Matthew Daniel

Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service

* Kurt Kevin Hallead

RBC Capital Markets, Research Division - Co-Head of Global Energy Research & Analyst

* Stephen David Gengaro

Loop Capital Markets LLC, Research Division - Former MD

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Presentation

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Operator [1]

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Good morning, and welcome to the Superior Energy Services Third Quarter 2019 Earnings Conference Call. (Operator Instructions)

I would now like to turn the conference over to Paul Vincent. Please go ahead.

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Paul Vincent, Superior Energy Services, Inc. - VP of IR [2]

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Good morning, and thank you for joining Superior Energy's Third Quarter 2019 Conference Call. With me today are Superior's President and CEO, Dave Dunlap; our CFO, Westy Ballard and our CAO, Jamie Spexarth. During this conference call, management may make forward-looking statements regarding future expectations about the company's business, management's plans for future operations or similar matters. The company's actual results could differ materially due to several important factors including those described in the company's filings with the Securities and Exchange Commission. Management will refer to non-GAAP financial measures during this call. In accordance with Regulation G, the company provides a reconciliation of these measures on its website.

With that, I'll turn the call over to Dave Dunlap.

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David D. Dunlap, Superior Energy Services, Inc. - President, CEO & Director [3]

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Thank you, Paul, and good morning to everyone listening to our call today. We'll begin with a brief review of our third quarter activity. Westy will discuss segment results and I'll offer thoughts on our outlook before turning the call over for Q&A. Before discussing our quarterly results. It is important to address the action taken by the New York Stock Exchange to commence proceedings to delist our company's common stock during the quarter. On September 26th, during market hours, we received notice that trading of our stock had been suspended on the New York Stock Exchange and that the exchange intended to commence delisting proceedings as a result of an abnormally low share price for an extremely short period of time.

Since the intraday low on September 27th, the first full day of trading after the NYSE took this extraordinary action, our share price increased more than 560% through November 3rd. We have publicly disclosed that we are appealing this ruling. Additionally, we continue to take measures to regain listing compliance with the exchange within the original 6-month cure period we were granted by the exchange when we received a non-compliance letter in August. These measures include improving the results of our operations, divesting noncore assets and conducting a reverse stock split of our shares.

I want to be clear that while there are very understandable concerns about our ability to reduce, repay and refinance our debt due in December 2021, approximately 26 months from now, our primary objective today and every day is to do what we believe is best for our shareholders.

As such, we believe it is in the best interests of our shareholders for Superior Energy to be listed on a major national securities exchange, whether that be the NYSE or one of its competitors. Immediately following the NYSE suspension of trading in our stock, we opened a special one-week purchase window and a number of our directors and executive officers purchase shares. After additional discussions with our Board of Directors on October 1, we announced authorization to repurchase up to $15 million of our common stock. And to date, we have repurchased more than 9.7 million shares at an average price of approximately $0.43 per share.

We believe these actions more so than any words demonstrate our commitment to improving the value of our common stock and confidence we have in resolving negative sentiment regarding our ability to manage an unsecured debt maturity more than 2 years from today. For the third quarter of 2019, Superior Energy generated revenue of $426 million, adjusted EBITDA of $65 million and an adjusted net loss from operations of $34 million or $0.22 per share.

As has been the case for the past several quarters, U.S. land markets contracted resulting in lower sequential revenue. Throughout the year, we have been very responsive to lower activity levels and have continually reduced our exposure to the U.S. land market most notably in pressure pumping, which has been the most competitively challenged service line. As a result of this proactive approach to activity reductions, our U.S. land revenue decline of 6% during the quarter was in line with the sequential decline in the U.S. land rig count after adjusting our revenue for the sale of drilling rig service line, which occurred in the second quarter. Although the U.S. land market is difficult today with a challenging outlook, we are not idle. During the third quarter, we began the process of further integrating our well services and fluid management service lines under a more efficient basin-centric management structure.

This is a natural continuation of the integration of our U.S. service lines that has been underway since 2015. This particular integration is substantial and we'll have both financial and commercial benefits for Superior Energy. In addition to our initial estimate of at least $10 million of annualized cost reductions, this integration will result in improved capabilities to respond to market opportunities with packaged services that address the non-drilling, non-frac service opportunities over the life of a U.S. onshore well. We believe that over 50% of the revenue opportunity in these service lines occurs post completion during the producing life of a horizontal well.

The combination of these service lines encompasses greater than 25% or greater than $550 million of our 2018 consolidated revenue of $2.1 billion. This meaningful component of our organization is asset-rich, we'll operate with a very low capital profile for the foreseeable future and is scalable. Our immediate focus will be to enhance the current free cash flow capacity of these service lines and be the large-scale, multi basin provider of lifecycle services. As mentioned, the hydraulic fracturing market in the U.S. is exhibiting significant structural weakness, which will likely take quite some time to resolve as pricing remains weak and equipment supply in the market is well in excess of even the most optimistic demand estimates.

Given these realities, we continued to reduce the number of active fleets during the quarter from 6 to 5, although there are indications that some of our competitors are now reducing their marketing capacity, the hydraulic fracturing market remains challenged. Our operational priorities continue to be aligned with our financial objectives of improving operating margins, improving return on capital and building cash balances. During the 3rd quarter, we accomplished these objectives as capital spending was lower, resulting in strong free cash flow and an increase in cash of $26 million. Building cash through operations and noncore divestitures directly supports our debt reduction objectives which we believe is an important factor in improving shareholder value over time. During the quarter, the divergence between U.S. land from U.S. offshore and international markets continued. While U.S. land drilling and completion activity weekend, the U.S. offshore and international markets continue to expand. In contrast to the weakening U.S. land market we experienced improved results in our U.S. offshore and international regions. In the U.S. offshore region, completion activity increased, benefiting our premium drill pipe and completion tools business and our expectations are for activity to remain steady during the fourth quarter, although seasonality is always a risk.

International revenue grew during the quarter primarily due to increased premium drill pipe rentals in Latin America and West Africa. Recently, we conducted our first summit job in Kuwait after being awarded a 5-year contract earlier this year. This opportunity in a new market for us is indicative of the types of expansion opportunities we will target internationally in the future. Full year 2019 international revenue growth of at least 10% seems reasonable to achieve at this point. We are committed to consistently generating free cash flow, reducing capital expenditures, improving our returns on invested capital over time, divesting service lines which are not competitive for capital and lowering total debt levels.

We are orienting Superior Energy toward an environment of low to no U.S. land growth and moderate U.S. offshore and international improvement over time. We do not anticipate a sudden cyclical recovery; however, the diversity of our business is our strength in overcoming these challenges and was critical to our results during the quarter. We are an incredibly -- We are in an incredibly difficult market and are forever grateful to the effort and dedication of our people to conducting our work safely while continually seeking ways in which to adapt to a fast changing environment. After almost 5 years since oil prices begin their exceptional decline, the people who remain in this industry are giving everything they have on behalf of our company and are the embodiment of our values and culture. The continued achievement of operational and financial milestones that will improve our capital structure will be a direct result of the blood, sweat and tears of the incredible team we have. I know you are listening and I hope you all know how much I honor what you are doing to support our organization as we confront the challenges ahead of us.

And with that, Westy will discuss our third quarter financial results.

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Westervelt T. Ballard, Superior Energy Services, Inc. - Executive VP, CFO & Treasurer [4]

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Thank you, Dave, and good morning, everyone. In discussing our operating segments, all adjusted third-quarter sequential comparisons will be made to our adjusted second quarter results. I'll also provide commentary regarding fourth quarter expectations for each segment. As we have discussed in the past, our focus has been the generation of cash and enhanced liquidity through continued capital discipline, ongoing noncore divestitures and management of working capital. This quarter, we generated $21.4 million of free cash flow, an increase of $18 million from the second quarter despite a weakening U.S. land market. Our cash position increased to $260 million. We continue -- we expect to continue to build cash during the fourth quarter, generating free cash flow of $5 million to $10 million. CapEx for the quarter was $26 million and we now expect 2019 CapEx to be between $140 million and $150 million. We believe that we have our organization on a path to consistently generate free cash flow and grow cash in the quarters ahead.

Although we have not concluded on the operational outlook for 2020, I'm certain that we will lower capital expenditures and continue to reduce our cost structure over the next 12 months.

As for our segment results, our Drilling Products and Services total segment revenue increased to $111 million. Premium drill pipe revenue increased as a result of increased demand from U.S. offshore and international markets. For the fourth quarter, we expect segment revenue and EBITDA to be lower by 5% to 10%, primarily due to the U.S. offshore activity mix shifting towards drilling activity.

In our onshore completion and workover services segment, revenue decreased 11% to $145 million, primarily as a result of the divestiture of our drilling rig service line during the second quarter. We continue to reduce our deployed hydraulic fracturing fleets, an average of 5 fleets operating during the quarter. The pressure pumping market remains challenged and we'll continue to move horsepower from the market until per fleet economics are in excess of maintenance capital for a sustainable period.

Fourth quarter revenue and EBITDA is expected to decline as a result of fewer active pressure pumping fleets. These declines will be partially offset by an expected seasonal increase in our fluid management business.

Our production services total segment revenue of $99 million declined slightly, primarily due to lower coiled tubing activity. Looking ahead, we expect fourth quarter production services results to be relatively flat with our third quarter performance.

In the Technical Solutions segment, total revenue was up slightly to $71 million, strong U.S. offshore completion activity supported improved completion tool sales which were offset by reduced well control and subsea intervention activity as several projects concluded in the second quarter. Completion tools activity will be a large portion of our Q4 results in this segment, should all planned activity for the quarter Occur as scheduled, revenue could increase as much as 10% with strong corresponding EBITDA incrementals. Before turning the call back to Dave, [here are a few modeling] related items. G&A for the quarter was $63 million inclusive of a $4 million net benefit due to restructuring cost and a gain on a litigation settlement, we expect fourth quarter G&A to be approximately $70 million. DD&A is expected to be between $67 million and $70 million, fourth quarter interest expense is expected to be approximately $25 million. Thank you.

And I'll now turn the call back over to Dave for closing comments.

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David D. Dunlap, Superior Energy Services, Inc. - President, CEO & Director [5]

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Okay. Thanks. Westy, there is no doubt that the outlook for our industry has changed. No longer are market share and growth the primary measures of success. Moving forward, in a low-growth environment, we must prioritize full cycle returns, free cash flow and minimal usage of leverage. We've taken consistent measures to reduce capital spending and are now generating free cash flow, which we believe will be sustainable in the current environment. Additionally, after the exceptional deceleration experienced in U.S. land markets during the fourth quarter of 2018, we have been very aggressive in preparing ourselves for a similar event this year.

While this primarily relates to reductions in our pressure pumping capacity, we've also continued to integrate other U.S. land businesses which will reduce operating costs. As a result, we believe that while U.S. land markets face a significant risk of activity deceleration during the fourth quarter, the impact on Superior may be muted. There is limited visibility into 2020 work programs for U.S. land customers and we will not carry costs with the hope that activity next year will improve from current levels. As I mentioned, the diversity of our product and service lines is our strength and our cornerstone franchises are positioned to benefit from the growth we are seeing globally and in offshore markets.

International opportunities are not one single market and looking ahead, one success will be defined by which markets they have exposure to. For example, even with limited visibility, we expect overall international revenue to increase in 2020, perhaps as much as in the past several years. Looking more closely, we have doubts about near-term improvements in Argentina, but expect that any declines there will be more than offset by what we see as meaningful opportunities in the Middle East as well as increased activity offshore, particularly West Africa. Before concluding, there should be no doubt from listeners as to our core objectives. We are building cash, we are resolved to reduce total debt levels, and we'll continue to divest assets and service lines which do not compete for investment in the current oil field environment. We are determined to improve shareholder value through these initiatives and believe that the structural disruption our industry is experiencing will create opportunities for superior to take bolder strategic actions over time. That concludes our prepared remarks.

Operator, please open up the lines for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Kurt Hallead with RBC.

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Kurt Kevin Hallead, RBC Capital Markets, Research Division - Co-Head of Global Energy Research & Analyst [2]

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Hey, appreciate the candor as always and the additional color commentary. So Dave, on the onshore completion and well services business, you kind of outlined the dynamics that are taking place there and the benefits you kind of alluded to. I'm just wondering like as we think about that element, how do we think about the improvement may be in margins or returns on capital within that segment, as you kind of execute on that game plan?

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David D. Dunlap, Superior Energy Services, Inc. - President, CEO & Director [3]

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Yes, [we will say that -- I mean] the integration that we've done is, it carries over to both the onshore completion and the Production Services segment. In onshore completion segment, that's where service rigs and fluid management and of course fracturing resides, so there'll be some margin improvement over time as a result of the integration. I don't know how much of it is evident during the fourth quarter as we continue to see and expect to see utilization decline during the fourth quarter. But I think when we start comparing quarter -- year-over-year quarters as we get into 2020, the impact of the cost savings that we're putting in place will become very apparent. And then, like I said, it will be evident in both the completion segment as well as in the production services segment.

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Kurt Kevin Hallead, RBC Capital Markets, Research Division - Co-Head of Global Energy Research & Analyst [4]

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Okay. And then Westy, I appreciate the guidance you provided on 4Q. So the dynamics around the onshore completion and well services business you said declined due to fewer fleets, kind of get that. Just wondering, you gave kind of order of magnitude of revenue declines and margin impact for the other businesses, I wonder if you can potentially help us out and take -- as we take a stab at what that might mean for that business segment as well.

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Westervelt T. Ballard, Superior Energy Services, Inc. - Executive VP, CFO & Treasurer [5]

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More specifically to DPS or across the enterprise?

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Kurt Kevin Hallead, RBC Capital Markets, Research Division - Co-Head of Global Energy Research & Analyst [6]

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Just on the onshore completion of well services business.

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Westervelt T. Ballard, Superior Energy Services, Inc. - Executive VP, CFO & Treasurer [7]

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Margin declines will -- won't be as dramatic, certainly, we don't have the visibility that we would like to have in the fourth quarter and so it's a little difficult. But I plan on flat for now in that segment

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Operator [8]

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Our next question comes from Stephen Gengaro with Stifel.

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Stephen David Gengaro, Loop Capital Markets LLC, Research Division - Former MD [9]

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So Dave, when you think about this, if we're to look out 24 months and we look back at kind of the road map to get you where you would like to be in 24 months, what has to happen both operationally, from a cash generation perspective, et cetera. How do you -- you must have a thought process on how this evolves over the next 2 years as the debt maturity comes due. So what are the key drivers you think you need to hit over the next 24 months and whether it's market-driven [or SPN, it's] -- maybe both.

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David D. Dunlap, Superior Energy Services, Inc. - President, CEO & Director [10]

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Yes, sure, Stephen. So I mean -- I don't think there is any thought in our shop about the market being able to help us much from the standpoint over the course of the next 24 months. I mean, we've got to take actions and make our -- make a conclusion that the market is going to continue to be soft. And so when you think about the levers that we have to pull, it is related to what we do from an operational cost standpoint and continuing to drive our cost structure down, I think we've been very effective in doing that and then once again reduce capital spending and our objective over that 24-month period is to generate as much free cash flow as possible at our operations to put us in a better position to deal with the December 2021 maturities.

At the same time, we have clearly been taking steps to divest of certain assets that would be additive to that cash balance and we've had success with that this year, we didn't have any divestitures that closed during the third quarter, but we did of course have the drilling rig divestiture in the second quarter. I think what you can expect us to do is to continue to look for opportunities to add the cash balance through divestitures and we are acutely aware of the challenges that exist in the marketplace and we are not counting on the marketplace to help us, this is all self-help.

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Stephen David Gengaro, Loop Capital Markets LLC, Research Division - Former MD [11]

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Okay. Great. And then just as a quick follow-up, when you think about 2020 CapEx, I know you guys mentioned it would be down, I imagine most of that, any -- can you maybe break out what's maintenance and what's growth and I imagine any growth CapEx would be targeted to the international markets, is that the right way to think about it.

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David D. Dunlap, Superior Energy Services, Inc. - President, CEO & Director [12]

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That's clearly the right way to think about it, I mean the U.S. land market is not one where we will see growth opportunities in 2020 or probably for quite some time, we certainly did it in 2019. There may be some opportunities in premium drill pipe which would be a product line that we would prioritize both from a growth capital and a maintenance capital standpoint, because the returns are the highest that we have in any of our service lines in premium drill pipe. I'd say, bottom hole assembly is very close to a similar return as we get in premium drill pipe, but I think what you should be expecting and we have not completed a 2020 budget yet, so I don't -- I'd rather wait and give pure guidance on 2020 capital spending until we've done that. But if you're thinking about something less than $100 million, you're thinking about it correctly and clearly we've taken our pace of spending down to that point where in 2019, if you kind of think about what we did from a capital spending standpoint in the third quarter, it's on that pace of $100 million. I think it'll be a bit lower than that.

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Operator [13]

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Our next question comes from John Daniel with Simmons Energy.

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John Matthew Daniel, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [14]

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Dave, I'm just curious if you can provide a bit more color on the restructuring steps you took within the well service and trucking business specifically. Just any color on magnitude of facility consolidation and just sort of where you're targeting that business geographically today and just some -- if you can color on what the working fleet is?

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David D. Dunlap, Superior Energy Services, Inc. - President, CEO & Director [15]

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Yes. Sure, so I mean it's -- I'd rather get into the details on the capacity of the working fleet maybe offline, it's just a lot of detail, but just to give you a broad idea, I mean we have managed those service lines in a fashion where we had a management team and SG&A effort that was focused on fluid management and a separate effort that was around those other well site services including service rigs, coiled tubing, flow back, pressure control, cased-hole wireline, those are similar customers. They are clearly similar types of businesses and operating basins and the move we've taken is to consolidate what -- we're 2 separate entities. Our approach to the market is one that is now very much regional and so where we operate in the basins that we operate in, we've got a single team that has all of those assets available to them.

And John, really it's to take advantage of what we're finding as good opportunities that are in the production space outside of completion services and I know for a long time, there has been talk about, is there a production opportunity for service rigs, and I don't know that my opinion on that has necessarily changed, but we're seeing plug and abandonment opportunities, we're seeing opportunities where we're providing pressure control via hydraulic horsepower on parent wells while child wells are being fracked and all of those are packaging opportunities, so think about the plug and abandonment, where we can put a service rig, we can put a [cement unit], we can put all of the accessory equipment and basically provide a package to do all of that and that's better managed on a regional basis and taking advantage of customer relationships. I think our concentration is in places like Mid Continent, DJ Basin, Powder River Basin, but we also have exposure of course in the Permian and Eagle Ford as well as the Marcellus. I hope that gives you the color you are looking for.

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John Matthew Daniel, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [16]

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Yes, it helps. (inaudible) the last one. If things just stay where they are and I know you don't want to provide a 2020 guidance formally, but what's the right place holder for G&A after you go through all of the changes you've done [separately].

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David D. Dunlap, Superior Energy Services, Inc. - President, CEO & Director [17]

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I mean, I think that -- I think that the reductions that we have undertaken from a G&A and overall from a cost standpoint over the course of the last 4 or 5 years has been iterative and I think you can expect us to continue to take steps and iterative moves to continue to grind down overall SG&A costs. It's -- we've not been static in this, we've taken a lot of G&A out since the downturn began, but we are constantly evaluating ways to operate more efficiently, whether that's from a sales team standpoint or a management team standpoint or facility standpoint. So just expect us to continue to grind those costs down.

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Operator [18]

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This concludes our question-and-answer session. I would like to turn the conference back over to Dave Dunlap for any closing remarks.

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David D. Dunlap, Superior Energy Services, Inc. - President, CEO & Director [19]

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Okay. Well, we appreciate all of you joining us today and happy to answer any follow-up questions offline. Thanks.

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Operator [20]

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The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.